Save for later Print Download Share LinkedIn Twitter More than ever, renewables are the cheapest option for new power generation — despite big kinks in the global supply chain and the surge in commodity prices. Those are top takeaways from Energy Intelligence's new data on the cost of electricity generation, known as the levelized cost of energy (LCOE). The cost advantage enjoyed by solar photovoltaic (PV) and onshore wind is happening in spite of — and arguably thanks to — the recent increase in commodity prices. Indeed, high fuel and carbon prices have dragged fossil fuels far behind most renewables in the race for cheapest power costs in Europe and, to a lesser extent, in other global regions. Meanwhile, high metals prices are creating a slowdown for renewables' cost trajectory but not a roadblock. They have caused renewable LCOEs to stabilize in the past year — instead of decreasing as they have been doing for years. Climbing CostsKey commodities and freight costs make up about 15% of total solar PV and 20% of onshore wind investment costs, according to the International Energy Agency (IEA). Copper and steel contribute the most to the cost of wind projects, as large quantities of steel are used in manufacturing and construction of the tower, nacelle and mechanical equipment, and large quantities of copper in electrical equipment. PV's largest cost component is the manufacturing and shipment of modules, which are directly affected by the price of polysilicon, steel, aluminum and copper. Obviously, conventional technologies use many of the same commodities. But renewables usually need more equipment per megawatt hour generated because of the low energy density of wind and sunlight.Increases in commodity prices do not immediately affect investment costs as developers and manufacturers maintain stocks of materials and have contracts based on past prices. But expensive raw materials and logistics costs are likely to result in higher LCOEs. "We estimate that the overall investment cost of utility scale PV and onshore wind plants could increase by around 25% due to the commodity and freight price surge," the IEA warns.Renewable power purchase agreement prices in Europe have already surged 8% during the first quarter of 2022 and 27% from a year ago, according to consultancy LevelTen Energy. But the appetite for renewables remains strong, LevelTen also found. This is "quickly creating an imbalance between demand for renewables and supply, as developers struggle to match the pace of demand."Besides supply chain issues, permitting is also viewed as a key barrier. In Spain, for example, more than 70 gigawatts of solar projects are currently in the pipeline to be constructed, but only about 20% have received appropriate permitting, according to LevelTen. European governments, in order to accelerate renewable development and minimize Russian energy imports, are taking steps to address this issue and streamline project development.Wind and PV generation costs remain lower than fossil fuel alternatives, especially with current high gas and coal prices, the IEA insists. Gas-based electricity costs have doubled in a year in Europe, and have increased by around 30% in the US. Lower gas prices would help but only partly. If instead of the current spot price of $28 per million Btu or the current 12-month average of $23/MMBtu, gas was at $7/MMBtu in Europe, CCGTs would generate at $95/MWh instead of $196/MWh and still be displaced by onshore wind and PV. They would still be beaten if renewable investment costs were increased by 25%, Energy Intelligence calculations show.Rising interest rates in the current macroeconomic environment also threaten to increase the cost of capital — and LCOE — for all technologies. Calculations suggest, however, that onshore wind and PV would still be cost-competitive with fossil fuels, but by a much thinner margin because renewables are more capital-intensive per MWh generated and would therefore be more impacted.The Road AheadLooking forward, the actual impact of expensive supply costs on renewable LCOEs is likely to remain moderate, many experts believe. Polysilicon prices, for example, have more than tripled during 2021, but this was driven by a fear of shortages that did not materialize. Substantial new capacity has come on line in 2022 and declines in the price of solar modules have started to be observed again in the past few months. Likewise, Chinese wind equipment prices have hit record lows in 2021 due to competition among suppliers left with manufacturing overcapacity after exceptionally high deployment in 2020. Wood Mackenzie believes these trends will continue in 2022.The main drivers for solar cost reductions include economies of scale, particularly through automation and manufacturing standardization, together with increased material and energy conversion efficiency. Solar trackers and bifacial panels also play a role in the reduction of LCOEs. Tracking the sun allows higher power generation in the early morning and late evening, while bifacial cells increase output as they convert sunlight reaching both sides of the panel into electricity. Wind energy costs are also expected to continue falling, with growing turbine size as a key driver. Larger turbines should offset the negative impact of a potential movement toward less-attractive wind sites as, understandably, the best areas were preferably selected for early projects.